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    1. The growth rate in dividends calculated from the dividend history from 2018-2022 is 5.5%. 2. The current cost of equity is calculated to be 16% using the dividend growth model and information provided about the company's earnings, dividends, share price, and capital structure. 3. Under the new business arrangements where dividends will increase to Rs. 20 per share next year and growth will reduce to 7%, and cost of equity increases by 2%, the market value of the company is calculated to increase by Rs. 122,231.

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    1. The growth rate in dividends calculated from the dividend history from 2018-2022 is 5.5%. 2. The current cost of equity is calculated to be 16% using the dividend growth model and information provided about the company's earnings, dividends, share price, and capital structure. 3. Under the new business arrangements where dividends will increase to Rs. 20 per share next year and growth will reduce to 7%, and cost of equity increases by 2%, the market value of the company is calculated to increase by Rs. 122,231.

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    3 views2 pages

    6th Homework MFA

    Uploaded by

    Ahmed Raza
    1. The growth rate in dividends calculated from the dividend history from 2018-2022 is 5.5%. 2. The current cost of equity is calculated to be 16% using the dividend growth model and information provided about the company's earnings, dividends, share price, and capital structure. 3. Under the new business arrangements where dividends will increase to Rs. 20 per share next year and growth will reduce to 7%, and cost of equity increases by 2%, the market value of the company is calculated to increase by Rs. 122,231.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    Question 1

    Sumair Limited has been paying dividend to its ordinary shareholders in the following manner:

    2022 2021 2020 2019 2018


    Earning per share 24.7765 23.3730 22.3606 21.0000 20.0000
    Dividend per share 17.3435 16.8286 15.8760 15.1200 14.0000

    Following is the capital structure of the company at 31 December 2022:

    Share Capital (Rs 10 per share) 160,000


    Retained earnings 1,536,000
    Total Equity 1,696,000

    The company's share is trading at a price earnings multiple of 7.03.

    Changes in business arrangement


    The company is changing the business sector due to which the following changes will be observed:

    1. Dividend for the next year shall increase to Rs 20 / share.


    2. Growth rate in dividends will be reduce to 7%
    3. Cost of equity will be increased by 2% (Old+2%)

    Required
    1. Calculate growth rate in dividends using:
    a) Dividend history
    b) Gordon's model
    2. Calculate cost of equity (current situation)
    2. Calculate the impact of the above measures on the market value of the company.

    Solution

    Growth rate through dividend history Growth rate using Gordon's function

    Dividend in 2018 14.0000 Retention ratio


    Dividend in 2022 17.3435 Earnings per share 24.7765
    Time in between 4 years Dividend per share 17.3435
    Growth rate 5.500% Retention per share 7.4329
    % of profit 30.0000%
    Since growth rate calculated
    using dividend history is more Return on Equity
    reliable we will take it for Profit total 396,424 (24.7765x16,000)
    further calculations Opening Equity 1,577,073 (Closing+Div-Profit)
    ROE 25.137%

    Growth rate (bxr) 7.541%


    Cost of Equity

    Market Value per share


    PE multiple 7.0300
    EPS 24.7765
    MV per share 174.1787

    Cost of equity 16.00% 17.3435(1+5.5%)/174.1787 + 5.5%

    Impact of changes in business arrangements

    Next year dividend 20.00 Rs per share


    Growth rate new 7.00%
    New Ke 18.00%

    Market value per share 181.82


    Total market value 2,909,091 16,000x181.82

    Comparison
    Previous market value 2,786,860 16,000 x 174.1787
    New Market Value 2,909,091
    Increase 122,231

    Conclusion
    New business arrangement is profitable for the company

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